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Recipe Unlimited Corp
Symbol C : RECP
Shares Issued 27,927,923
Close 2018-11-08 C$ 27.08
Recent Sedar Documents

Recipe Unlimited earns $23.8-million in Q3

2018-11-08 21:20 ET - News Release

Mr. Frank Hennessey reports

RECIPE UNLIMITED REPORTS THIRD QUARTER POSITIVE SAME RESTAURANT SALES GROWTH OF 1.8% AND EBITDA GROWTH OF 9.2%

Recipe Unlimited Corp. (formerly Cara Operations) has released its financial results for the 13 and 39 weeks ending Sept. 30, 2018.

"Our franchisees, brand and shared service teams delivered another successful quarter. I want to thank them for their hard work and commitment to focus on continual improvement on our four pillars of food, service, value and ambiance. Their efforts helped increase same-restaurant sales by 1.8 per cent for the quarter," commented Frank Hennessey, chief executive officer.

Highlights for the 13 and 39 weeks ended Sept. 30, 2018:

  • System sales grew $195.1-million to $879.8-million for the 13 weeks ended Sept. 30, 2018, compared with 2017, representing an increase of 28.5 per cent. For the 39 weeks ended Sept. 30, 2018, system sales grew $505.4-million to $2,510.0-million, compared with the same period in 2017, representing an increase of 25.2 per cent. The increase in system sales is primarily related to same-restaurant sales increases, the additions of Pickle Barrel in December, 2017, and The Keg in February, 2018.
  • Same-restaurant sales (SRS) growth for the 13 and 39 weeks ended Sept. 30, 2018, was an increase of 1.8 per cent and 1.9 per cent, compared with the same 13 and 39 weeks in 2017. This SRS increase represents the fifth consecutive positive SRS quarter. While management is pleased with the positive trend, management continues to focus on long-term profitable SRS growth with both short-term and long-term strategies to improve SRS with focus on four pillars -- quality of food, quality of service, value for experience and ambience. At the end of Q3 on Sept. 28, 2018, the company experienced a malware incident resulting in the disruption of service impacting sales at certain restaurants. The company estimates that the SRS impact from the incident was a decrease of approximately 0.3 per cent for the quarter. Additional information on the malware incident can be found on page 7 of the company's MD&A (management's discussion and analysis).
  • Operating EBITDA (net earnings (loss) before: (i) net interest expense and other financing charges; (ii) income taxes; (iii) depreciation of property, plant and equipment; and (iv) amortization of other assets and deferred gain) increased to $52.4-million for the 13 weeks ended Sept. 30, 2018, compared with $48.0-million in 2017, an improvement of $4.4-million or 9.2 per cent for the quarter. Year to date, operating EBITDA was $155.0-million, compared with $132.5-million in 2017, an improvement of $22.5-million or 17.0 per cent. The increases have been driven by the same-restaurant sales increases, improved contribution from the corporate and franchise segments, improved contribution from Original Joe's, and the addition of The Keg in February, 2018, partially offset by The Keg royalty expense paid to The Keg Royalty Income Fund, higher net overhead costs from the addition of The Keg and a third quarter shift in overhead bonus accrual expenses. Bonus expense excluding The Keg for the 13 weeks ended Sept. 30, 2018, was $2.8-million higher than Q3 2017.
  • Operating EBITDA margin on system sales was 6.0 per cent for the third quarter, as compared with 7.0 per cent in 2017. The decrease is primarily related to The Keg royalty expense and the shift in bonus accrual expenses. Excluding The Keg royalty expense and the impact from the shift in bonus accrual expenses, operating EBITDA margin on system sales was 6.7 per cent for the quarter. Year to date, operating EBITDA margin on system sales was 6.2 per cent, compared with 6.6 per cent in 2017. The decrease is primarily related to The Keg royalty expense. Year to date, operating EBITDA margin on system sales excluding The Keg royalty was 6.5 per cent compared with 6.6 per cent in 2017. While The Keg will add EBITDA dollars, because of higher net central overhead costs and the royalty payments to The Keg Royalty Income Fund in the medium term, The Keg merger will reduce Recipe's operating EBITDA margin on system sales below the target range of 7 per cent to 8 per cent. Management's focus will continue to be on improving the earnings efficiency of the company's assets and its increased sales base to grow operating EBITDA as a percentage of system sales back to within the company's target range of 7 per cent to 8 per cent by 2020 to 2022.
  • Earnings before change in fair value of non-controlling interest liability, change in fair value of exchangeable Keg partnership units and income taxes were $32.0-million for the 13 weeks ended Sept. 30, 2018, compared with $30.4-million in 2017, an increase of $1.6-million for the quarter. The increase in the quarter is primarily related to same-restaurant sales increases, improved contribution from the corporate and franchise segments, and the addition of The Keg. Year to date, earnings before changes in fair value of certain financial instruments and income taxes were $91.2-million for the 39 weeks ended Sept. 30, 2018, compared with $79.5-million in 2017, an increase of $11.7-million or 14.7 per cent year to date. The increase was primarily related to the same-restaurant sales increases, improved contribution from the corporate and franchise segments, improved contribution from Original Joe's, and the addition of The Keg in February, 2018, partially offset by The Keg royalty expense paid to The Keg Royalty Income Fund.
  • During the 13 and 39 weeks ended Sept. 30, 2018, the company approved a plan to take back certain underperforming Swiss Chalet restaurants in Western Canada with the intention to refranchise locations to stronger franchisee partners and to permanently close locations that do not meet the company's long-term strategic portfolio of restaurants. Total restructuring costs under this plan were estimated to be approximately $1.9-million, comprising expected lease exit costs.
  • Adjusted basic earnings per share (EPS) for the 13 and 39 weeks ended Sept. 30, 2018, were 51 cents and $1.43, compared with 48 cents and $1.35 in 2017, an increase of three cents per share and eight cents per share, respectively. Adjusted diluted EPS for the 13 and 39 weeks ended Sept. 30, 2018, was 50 cents and $1.38, compared with 46 cents and $1.30 in 2017, also an increase of four cents per share and eight cents per share, respectively.
  • During the 13 and 39 weeks ended Sept. 30, 2018, the company purchased and cancelled 27,700 and 66,237 subordinate voting shares for $700,000 and $1.7-million, respectively, under the company's normal course issuer bid (NCIB).
  • On Nov. 8, 2018, the company's board of directors declared a dividend of 10.68 cents per share of subordinate and multiple voting common stock. Payment of the dividend will be made on Dec. 14, 2018, to shareholders of record at the close of business on Nov. 30, 2018. With the company's strong balance sheet and growing cash flows, management will continue to pursue strategic acquisitions and will explore alternatives to return more capital to its shareholders, including continuation of its NCIB and increases to the company's dividend rate.

                                                   HIGHLIGHTS
                      (in millions of dollars, except per-share amounts and as noted) (1)

                                                                 13 weeks ended                        39 weeks ended
                                                    Sept. 30,          Sept. 24,          Sept. 30,          Sept. 24,
                                                        2018               2017               2018               2017

Total system sales from continuing operations         $879.8             $684.7           $2,510.0           $2,004.6
Total system sales growth (2)                          28.5%              36.9%              25.2%              43.1% 
SRS growth (3)                                          1.8%               0.9%               1.9%               0.0% 
Number of restaurants (at period-end)                  1,370              1,249              1,370              1,249
Corporate restaurant sales                              $199             $111.2             $548.8             $313.3
Number of corporate and joint venture restaurants        253                211                253                211
Contribution from corporate segment                    $21.6              $11.8              $59.0              $30.2
Contribution as a percentage of corporate sales        10.8%              10.6%              10.8%               9.6% 
Franchise restaurant sales                            $607.2             $515.7           $1,747.1           $1,521.3
Number of franchised restaurants                       1,117              1,038              1,117              1,038 
Contribution from franchise segment                    $25.7              $20.0              $72.8              $60.3
Contribution as a percentage of franchise sales         4.2%               3.9%               4.2%               4.0%
Contribution from food processing and distribution      $4.4               $3.4               $9.8               $8.7
Contribution from central segment                       $5.2              $16.2              $23.3              $42.0
Contribution as a percentage of total system sales      0.6%               2.4%               0.9%               2.1%
Contribution from central segment 
(excluding net royalty expense)                         $8.8              $16.2              $31.8              $42.0
Contribution as a percentage of total system sales      1.0%               2.4%               1.3%               2.1%
Total gross revenue                                   $312.4             $205.9             $871.3             $598.8
Operating EBITDA before The Keg royalty                $56.0              $48.0             $163.6             $132.5
Operating EBITDA margin on total system 
Sales before The Keg royalty                            6.4%               7.0%               6.5%               6.6% 
Operating EBITDA                                       $52.4              $48.0             $155.0             $132.5
Operating EBITDA margin on system sales                 6.0%               7.0%               6.2%               6.6%
Operating EBITDA margin                                16.8%              23.3%              17.8%              22.1%
Earnings before income taxes                           $31.4              $30.4              $89.2              $79.5
Net earnings                                           $23.8              $21.2              $64.8              $82.5
Adjusted net earnings                                  $32.1              $28.4              $88.3              $80.5
Earnings per share from continuing operations 
attributable to common shareholders (in dollars)      
Basic EPS                                              $0.38              $0.35              $1.05              $1.38
Diluted EPS                                            $0.37              $0.34              $1.01              $1.33
Adjusted basic EPS                                     $0.51              $0.48              $1.43              $1.35
Adjusted diluted EPS                                   $0.50              $0.46              $1.38              $1.30

(1) System sales, system sales growth, SRS growth, operating EBITDA, adjusted net earnings, adjusted basic EPS 
and adjusted diluted EPS are non-IFRS (international financial reporting standards) measures.

(2) East Side Mario restaurants in the United States are excluded from system sales totals.

(3) Results from New York Fries located outside of Canada, East Side Mario restaurants in the United States and 
Casey's restaurants are excluded from SRS growth.

The company's unaudited interim unaudited consolidated financial statements for the 13 and 39 weeks ended Sept. 30, 2018, and management's discussion and analysis, are available under the company's profile on SEDAR.

Outlook

Management is pleased with the third quarter results and continued growth in all segments, operating EBITDA and SRS. In the third quarter, total systems sales grew $195.1-million or 28.5 per cent to $879.8-million, operating EBITDA before the net royalty expense increased 9.3 per cent to $52.4-million with a contribution margin of 6.0 per cent as a percentage of total system Sales, and adjusted net earnings increased to $32.1-million.

With the full-year impact of The Keg merger, the company will add approximately $612.0-million in system sales, taking the company to approximately $3.4-billion in 2018, compared with the initial 2015 IPO (initial public offering) target range for 2020 to 2022 of $2.5-billion to $3.0-billion and the updated target range provided in 2016 after the St-Hubert acquisition of $2.9-billion to $3.7-billion. For a full year on a pro forma basis using prior-year results, The Keg merger will add approximately $23.5-million of operating EBITDA resulting in combined pro forma operating EBITDA of approximately $211.0-million, also within Recipe's updated target EBITDA range of $203.0-million to $296.0-million (based on 7 per cent to 8 per cent of system sales). However, while The Keg will add EBITDA dollars, because of net central overhead costs and royalty payments to The Keg Royalty Income Fund in the medium term, The Keg merger will reduce Recipe's operating EBITDA margin on system sales below the target range of 7 per cent to 8 per cent. Management's focus will continue to be on improving the earnings efficiency of the company's assets and its increased sales base to grow operating EBITDA as a percentage of system sales back to within the company's target range of 7 per cent to 8 per cent by 2020 to 2022.

Management provides the following comments regarding its strategies and initiatives.

System sales and SRS growth: Management is pleased with total system sales growth of 28.5 per cent for the quarter and with SRS of 1.8 per cent for the quarter, which is after the estimated impact of 0.3 per cent from the malware incident.

Management continues to focus on long-term profitable SRS growth with both short-term and long-term strategies to improve SRS with focus on four pillars -- quality of food, quality of service, value for experience and ambience. Sales growth initiatives also include new and improved e-commerce applications that will be expanded to most brands over the next two years, effective use of technology to enhance guest experiences and efficiencies, and brand specific digital-social media marketing.

Total operating EBITDA: The combined contributions from corporate, franchise, food processing and distribution, and central segments resulted in total operating EBITDA margin of 6.0 per cent for the quarter, compared with 7.0 per cent in 2017. Excluding the impact from the shift in overhead bonus accrual expenses and the net royalty to The Keg Royalties Income Fund, total operating EBITDA margin was 6.7 per cent for the quarter. While The Keg will add EBITDA dollars, because of net central overhead costs and royalty payments to The Keg Royalty Income Fund in the medium term, The Keg merger will reduce Recipe's operating EBITDA margin on system sales below the target range of 7 per cent to 8 per cent. Management's focus will continue to be on improving the earnings efficiency of the company's assets and its increased sales base to grow operating EBITDA as a percentage of system sales back to within the company's target range of 7 per cent to 8 per cent by 2020 to 2022.

Corporate restaurant profitability: Corporate restaurant profitability was 10.8 per cent for the quarter, compared with 10.6 per cent in 2017. The improvement during the quarter was mostly from the addition of The Keg, which operates within the company's target range. Management believes there is significant opportunity for improved contribution in the future from Original Joe's and Pickle Barrel as management realizes operating synergies from lower food and beverage costs and better labour management tools. Contribution will also improve as renovated restaurants reopen at higher sales levels and from the sale of certain corporate restaurants in franchise banners.

Management will continue to pursue the sale of certain corporate restaurants in its franchise banners to franchisees and will pursue the sale of its share in joint venture locations to the company's joint venture partners to convert joint venture locations to franchise to improve the corporate-franchise portfolio mix. During the 39 weeks ended Sept. 30, 2018, 15 corporate restaurants were sold and refranchised and eight joint venture restaurants were franchised.

Franchise segment: Franchise contribution as a percentage of franchise sales has improved to 4.2 per cent in the third quarter of 2018, compared with 3.9 per cent in 2017. The increase is primarily related to the addition of The Keg, which collects average royalties over 5 per cent.

Food processing and distribution: Contribution dollars from food processing and distribution were $4.4-million and $9.8-million for the 13 and 39 weeks ended Sept. 30, 2018, compared with $3.4-million and $8.7-million in 2017. A new pie production line was added in the third quarter which will increase capacity and enable the company to meet the increased demand for its St-Hubert and Swiss Chalet frozen pie products with less reliance on higher-cost third party producers.

Central segment: The addition of The Keg has added net central overhead costs, including the royalty payments to The Keg Royalty Income Fund, thus reducing central contribution as a percentage of system sales. Management will work toward realizing synergy opportunities with the companies acquired, expand the company's off-premise business, including catering with the addition of Pickle Barrel, and the company will continue to improve on its model for growing sales faster than head office expenses and realizing earnings efficiency on higher system sales.

Restaurant count: In the 39 weeks ended Sept. 30, 2018, excluding the acquisitions, the company opened 39 new restaurant locations as compared with 35 in 2017. Year to date, the company closed 46 restaurants (excluding Casey's closures), compared with 35 closures in 2017. Included in the closures were underperforming locations where the closure will benefit the overall system performance and the company's profitability going forward. Closures also included locations that no longer fit the long-term strategy of certain brands. Management will continue to review its portfolio of restaurants and will opportunistically close underperforming or non-strategic locations that will benefit the company long term. Management expects to achieve positive net new restaurants openings in the fourth quarter and for the full year ended 2018.

The Keg merger initiatives: Management is focused on realizing synergy opportunities from The Keg merger to improve the company's combined earnings and earnings efficiency. Management is also excited to add the influence of David Aisenstat to the Milestones, Bier Markt and Landing premium brands.

Retail opportunities: Since the acquisition of St-Hubert in 2017, the company has successfully launched a number of products, including Swiss Chalet ribs and pot pies, across the country in grocery chains. During the third quarter, the company completed the addition of a pie manufacturing line which will increase production of frozen pot pies and reduce third party costs to meet sales demand. Management is pursuing the launch of several more Recipe-branded retail products to expand its retail presence in national grocery chains.

Growth and acquisitions: The company currently has a debt to EBITDA ratio of approximately 1.94 times. At this debt level and with strong cash flow from operations, the company has the ability to consider more growth opportunities while continuing to reduce its debt and by opportunistically repurchasing its subordinate voting shares for cancellation under the NCIB. During the 13 and 39 weeks ended Sept. 30, 2018, the company purchased and cancelled 27,700 and 66,237 subordinate voting shares for $700,000 and $1.7-million, respectively, under the company's NCIB program.

About Recipe Unlimited Corp.

Founded in 1883, Recipe (formerly Cara Operations) is Canada's oldest and largest full-service restaurant company. The company franchises and/or operates some of the most recognized brands in the country, including Swiss Chalet, Harvey's, St-Hubert, The Keg, Milestones, Montana's, Kelsey's, East Side Mario's, New York Fries, Prime Pubs, Bier Markt, Landing, Original Joe's, State & Main, Elephant & Castle, The Burger's Priest, The Pickle Barrel, and 1909 Taverne Moderne.

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